D076 Finance Skills for Managers - (TEST)

A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? - Agency problem due to conflicting interests (Correct! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.) A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment using a method that considers the time value of money. Is there more than one way to do this? - Yes, the analyst could use both the NPV and the IRR. (Correct! Both NPV and IRR take into account the time value of money.) A firm had sales of $100,000 this month. However, the firm received only $90,000 in cash from sales. Why would the firm receive $10,000 less cash than its monthly sales? - Because the firm did not make all sales on cash (Correct! Some sales are made on credit rather than cash, and a portion of credit sales are collected in the following months after the sales.) Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a $600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent $2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in the company's capital budgeting decision? - 3,000,000 for the offer price of the land (Correct! If you do the project, you will miss the opportunity to sell the land for $3,000,000. This is an example of an opportunity cost.) Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? - Tighten the credit standards for its customers. (Correct! The credit standards are too loose, so the customers are not paying Firm A as quickly as they are paying other competitors in the industry. Tightening the credit standards would shorten the average collection period.) How do you factor sunk costs into capital investment analysis? - For the purposes of analysis, sunk costs are irrelevant. (Correct! Sunk costs are costs that have already been incurred whether you choose to do a project or not.) How does management choose between two projects that are seemingly the same? - Management can analyze the different inherent risks that change the cost of capital to the firm. (Correct! Each project will have its own inherent risks.) How is risk defined in finance? - The possibility that the realized or actual return will differ from what we expect (Correct. Risk is defined as the possibility that the realized or actual return will differ from our expected return.) If two projects are mutually exclusive, which decision-making criterion will help you make the best decision about which project to accept? - Net present value (NPV)